Smithfield Foods Gambling On Merger: Foes Fighting Expansion

The pork company's opponents were fighting this week for federal regulators to deny the merger.

Smithfield Foods adversaries are trying to ensure that the world's largest pork company loses a $100 million bet.

If the Department of Justice allows Smithfield to purchase Premium Standard Farms, the $674 million deal will help Smithfield further bolster its position as the company that raises and slaughters the most hogs in the country.

A line of opponents has formed to protest, saying Smithfield will dominate the price of hogs. Smithfield and Premium knew the fight was coming, so the deal stipulates that Smithfield will pay $100 million to Premium if anti-trust regulators deny the deal.

But Smithfield was willing to take the risk. Smithfield gained confidence by surviving federal regulatory scrutiny when it bought Farmland Foods in 2003. Many of the same groups that opposed that deal also oppose this new one.

The National Farmers Union, along with a coalition of rural and farm groups, made a case to the Justice Department this week, arguing the deal should be denied.

The opponents of the deal include a growing list of Midwestern politicians, who say the deal will give Smithfield the ability to determine hog prices. They formally asked the Justice Department to scrutinize the merger and have called for congressional hearings.

Smithfield is already the largest processor of hogs, with 26 percent of the market. By adding Premium, the company will have 31 percent. Farmers worry that with less competition for buying hogs, Smithfield can drive down prices.

Smithfield opponents say Premium had the only other slaughter facility in the Southeast. Without that competitor, Smithfield can set the prices it pays all farmers in the region to raise hogs, said Michael Stumo, general counsel for the competitive markets group.

"That, per se, should disqualify the acquisition on anti-trust grounds," said Stumo.

And all sales are under contracts that pay farmers a fee for raising hogs

there is no market price for the hogs themselves to be sold.

"You cannot sell hogs in that region unless you are contracted," said Stumo.

The company also will have a greater concentration of power in the Western and Southern part of the Midwestern hog production area. Even there, only about 10-15 percent of the hogs are sold on an open market.

By purchasing the second-biggest hog producer, Smithfield will raise about 20 percent of the hogs nationwide if the deal closes. Its clout on that side of the business will also help Smithfield influence the purchase of hogs by its competitors.

Stokes said he thinks the case is about as strong as possible, but that doesn't mean the government will intervene. He believes lower-level staff members at the Justice Department will support rejection, but will be overruled by political appointees.